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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Use your online broker, a direct purchase plan, a low-fee direct purchase plan, or buy no-load mutual funds, which may let you invest as little as $50 per monthA Final Word about Stopping Profit Wipe-Outs Selling your investments at the wrong time can result in Uncle Sam receiving a big chunk of your gains. When deciding which investments to sell, you should take into consideration the tax consequences of your decisionmaking. However, dont forget the elements listed earlier in this chapter. After all, the best strategy is to make good investments, hold on to them, and maximize your returns. In December of each year, look at your portfolio and determine whether it still fits your long-term financial objectives. Over the last year, some of your investments may have shifted. The shifting of these investments and your long-term financial objectives can result in a mismatch. Calculating the tax consequences of selling these particular securities might help you decide whether now is the right time to sell or to hold. Capital assets are defined as any property you can buy and sell. A capital gain occurs when you sell an asset for more than what you paid for it. Conversely, a capital loss happens when you sell an asset for less than what you paid for it. Table 19-1 shows a simplified view of how you calculate the basis for your capital gains. The first row gives the sales price of the securities. The second row shows how the original cost of the asset is deducted from the sales price. The third row lists the brokerage fees for buying and selling the securities that was deducted from the proceeds. The fourth row shows the net gain. You can hold your capital assets until the cows come home and not have to pay any taxes. However, the minute you sell, all your deferred capital gains (or losses) are taxed at your personal capital gains rate. There are two types of capital gains rates: Short-term capital gains: Capital assets owned for less than a year and sold for a capital gain (that is, more than their purchase price) result in a short-term capital gain. Short-term capital gains are taxed as ordinary income (at your regular tax rate). Long-term capital gains: Capital assets held for more than a year and sold for a capital gain are taxed at a maximum rate of 15 percent (if your marginal tax rate is 25 percent or higher). If your marginal tax rate is 10 or 15 percent, your long-term capital gains are taxed at 5 percent. (Note: These capital gains rates are scheduled to remain in effect until 2009). Table 19-2 shows the impact of the capital gains tax on an investor in the 35-percent tax bracket. Table 19-2 illustrates how the investor sells $30,000 worth of securities. The investors personal tax rate is 35 percent. The next row shows how the securities are taxed at the appropriate capital gains tax rate. The last row illustrates the tax liability for the sale of the securities. To sum it up, Table 19-2 shows how the investor saves $6,000 if he has a longterm gain. Table 19-2Comparing the Tax Consequences of SellingDescriptionSell On or BeforeSell After OneOne Yearor More YearsCapital gain$30,000$30,000Capital gains tax rate35 percent15 percentTax liability$10,500$4,500 For more information about the tax consequences of selling your securities, see these Web sites: InvestorGuide (www.investorguide.com/igutaxinv.html) offers a quick tutorial about taxes and your investments. Discover the ins and outs of how to calculate the cost basis of your securities. IRS Tax Tips for Capital Gains and Losses (www.irs.gov/newsroom/ article/0,,id=106799,00.html) offers a brief account of how exemp tions from capital gains are calculated and when you should pay taxes on capital gains. Additionally, find links to in-depth coverage of the capital gains rules for mutual fund distributions, investment income and expenses, and the sale of investments. SmartMoney.com (www.smartmoney.com/tax/capital/index. cfm?story=capitalgains), as part of its Personal Finance section, offers a guide to assist you in estimating your capital gains liability. The guide also includes a Capital Gains Tax Estimator. Just plug in your gains and losses for the investments you sold last year to figure out the taxes you owe. Ten Green Flags for Buying Buying low so that you can sell high Checking out earnings forecasts for bargain stocks that are trading under book value Selecting a P/E ratio strategy that works for you More Americans own equities than ever before. According to the Securities Industry Association (www.sia.com/press/FAQs/html/question11.html), a total of 84.3 million individuals owned equities (stocks) in early 2002 about 49.5 percent of all American households, a total of 52.7 million households. This number is a big change from 1983, when only 42.4 million individuals owned equities. Despite all this popularity, equities have a serious drawback: They dont offer the security of interest-bearing investments (market funds, CDs, and fixed-income securities). Interest-bearing securities offer consistent returns. In contrast, stock price fluctuations just happen. Every stock investor can count on market increases and decreases. These fluctuations arent company-specific, but that fact doesnt offer much comfort. Over time, stock investments tend to reward patient investors with good, inflation-beating returns that are greater than those of any other type of investment. For many individuals, investing is the only way to reach their financial goals. Over the years, avid investors have developed many methods to help others decide which stocks to buy and when to purchase them. No hard-and-fast rules exist. The approach thats best is the one that works for you. The following sections offer a collection of investor wisdom that can assist you in maximizing your personal wealth. Digging Out of a Recession with Dollar-Cost Averaging Many investors have learned that markets can decline as fast as they can increase. Frequently, a recession causes these market turnarounds. The National Bureau of Economic Research (NBER), located at www.nber.org, defines a recession as two or more quarters of negative gross domestic product (GDP) growth. The NBER documents the beginning and ending of recessions. Many companies (such as automobile manufacturers) have business cycles that are closely related to the GDP. For companies that are linked to the GDP, a recession means a reduction in sales and earnings, which in turn affects the profits of individuals who have invested in these companies. Understanding that the economy may be affecting the future performance of an investment candidate and factoring this information into your buying decision can be difficult. Ideally, you want to buy low and sell high. Some economic reports can assist you in predicting upturns. In other words, referring to these reports can help you get ready to buy. For example, if the consumer confidence survey (www.conference-board.org) shows an increase, the market may be improving; employment increases for two consecutive months (www.bls.gov/home.htm) may indicate an upturn; and the Census Bureau (www.census.gov/ftp/pub/indicator/www/m3/index.htm) showing a con sistent rise in capital-goods orders may be a predictor of a stronger market. What if there are no clear indicators of the market moving upward or downward? In this situation, the dollar-cost averaging approach is the best way to get back into the game. The dollar-cost averaging approach is used when you regularly invest a fixed sum. When stocks are down, you buy more. When stocks are up, you buy less. Use your online broker, a direct purchase plan, a low-fee direct purchase plan (such as ShareBuilder), or buy no-load mutual funds (for example, from Charles Schwab), which may let you invest as little as $50 per month. For a $4 monthly brokerage fee, ShareBuilder (www.sharebuilder.com) allows you to purchase the stocks you want and to automatically deduct the amount you select (it can be as little as $25) from your checking account. For the more affluent, Charles Schwab (www.schwab.com) has a similar plan; if you invest $500 per month in a no-load mutual fund, you pay no quarterly maintenance fees. Maintenance fees are $45 for accounts under $5,000 and $30 for accounts under $50,000. |
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